Pension Assumptions of 8 Percent Returns

A NYT article on the fate of Detroit's retired workers following its bankruptcy made reference to the pension funds' assumption of an 8 percent return following its bankruptcy. There are two points worth making on this issue. First, it was an error to assume an 8 percent return in 2007 given the ratio of stock prices to trend earnings. At the time, that was over 20, which meant that stock could be expected to provide a real return of less than 5 percent going foward. Adding in an inflation pr...